The British mobile service Vodafone has threatened the Indian government with international arbitration over a proposal that could make it liable for billions of dollars of taxes. Pressure is mounting on India to reconsider the proposal, which foreign investors say will deter investment in Asia's third largest economy.
Vodafone tax case
Vodafone's "notice of dispute" served to the Indian government this week, April 17, concerns a controversial proposal to levy retroactive taxes on any overseas acquisition of an Indian asset made since 1962.
The tax proposal was made last month after the Supreme Court ruled that Vodafone was not liable to pay a $ 2.2. billion tax demanded by the government for acquiring Indian mobile assets in 2007.
The ruling was hailed as a victory for foreign investors.
But the government's tax proposal, if passed, will effectively reverse Vodafone's legal victory and allow India to levy the tax.
Vodafone, which is India's largest foreign investor, says the new tax legislation violates international legal protections granted to foreign investors in the country.
Perils for foreign corporations
Vodafone's case has come to symbolize the perils foreign corporations face in India. Investors have expressed concern that the legal decision can be overturned.
A prominent tax lawyer in New Delhi, Mukesh Butani, says overriding a court decision introduces a lot of uncertainty about doing business in India.
"This has thrown open the entire debate with applicability of law. Clearly we have a challenge and there is an issue with respect to the rule of law and I personally feel there is a credibility issue so far as our judicial system is concerned," said Butani.
Foreign investors are also concerned that the tax proposal could affect hundreds of corporate transactions going back 40 years.
The government has tried to calm such fears. Indian authorities say the tax proposal will only affect transactions done in the last six years. They say it is meant to ensure that investors do not use tax havens to avoid paying taxes on profits earned by investing in India.
Concern among foreign investors
But this has failed to assure foreign investors. A global tax group and international industry groups representing more than 250,000 companies wrote to the Indian prime minister earlier this month warning that some members are re-evaluating their investments due to increasing levels of controversy and uncertainty regarding taxation in India. These bodies represent some of the world's largest companies such as General Electric.
Many are concerned the new proposal will dim the allure of India at a time when its economy is slowing and economic reforms have virtually stalled.
"The climate seems much more uncertain today than it was some time ago," said Rajiv Kumar who heads of the Federation of Indian Chambers of Commerce and Industry.
The proposed tax measure will be discussed when parliament convenes later this month.
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